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ARPI Accounting

Withholding Tax (WHT) – Part 4. Dividends

We invite you to read an article from our series on withholding tax (WHT). This publication discusses the license register and the tax burden. This article outlines the principles of using the withholding tax base and the basic fees and obligations arising from their application.

Subsidiary payments by a Polish parent company to a foreign shareholder are subject to withholding tax regulations. Pursuant to Article 22, Section 1 of the Corporate Income Tax Act, additional revenues and other income from a share in the profits of legal entities are subject to withholding tax at the 19% withholding rate.

The withholding tax payer is an external shareholder who pays the tax, and then collects and deposits it through the collection and payment of the tax at the Polish withholding entity, which fully performs the function of the withholding agent. In practice, this means that the withholding agent is directly responsible for the correct collection and remittance of the tax to the tax office. If the transfer is not subject to an exemption or preferential tax rate under an avoidance treaty, the Polish company is obligated to pay 19% withholding tax and pay it by the 7th day of the explanatory memorandum following the regulation, as published.

WHT dividends. Administrative Exemption

In the case of a regulatory authority subject to the withholding tax exemption requirement under Article 22, Section 4 of the Corporate Income Tax Act, this exemption implements the parent-subsidiary principle and may be applied provided the following conditions are met:

  • the tax official is a Polish tax resident;
  • the subject receipt is a subscription subject to tax on total ownership in the EU or EEA;
  • the control entity directly holds at least 10% of the issuing capital for an uninterrupted period of two years (although this may occur after the launch);
  • from a participant who does not benefit from the exemption from comprehensive insurance.

The exemption granted to a Swiss resident can be used, provided that in this case the capital shareholding is at least 25%. It should also be noted that, pursuant to Article 26, Section 1 of the CIT Act, the taxpayer is the basis for exercising due diligence when applying the exemption.

The existence of a beneficial owner (beneficial owner) is also relevant in the application. The provisions regarding distributions that are not remitted by the tax authorities, as well as some case law, indicate that even in the case of an exemption under Article 22, Section 4 of the CIT Act, the recipient must have the status of the beneficial owner who is being served.

It is worth noting the interpretation of the Minister of Finance of November 15, 2024 (DD9.8202.1.2024), which clarified that the use by a foreign consortium of the objective exemption for received items (resulting from the implementation of the Parent-Subsidiary Act) does not apply to the possibility of applying Article 22, Section 4 of the CIT Act. The non-use requirement is based on the subjective, comprehensive exemption, not the species-specific exemption.

Applicability of the Security Exemption Agreement

If an exemption requirement is not included, the preferential tax rate under the dual-use treaty may be applied.

Typical additional fees are charged at a rate of 15%; however, if additional conditions apply regarding the recipient’s capital share, the rate may be lower, down to 5%, or even 0%.

The preferential rate can be applied at the following address:

  • The payer has the recipient’s certificate of residence;
  • The recipient is the holder of the certificate;
  • The payer has exercised due diligence in verifying the application conditions.

The cause may be other factors that may arise from sources; each of these should be considered if it depends on the country of origin.

Payment and Refund Mechanism

From 2022, the effects resulting from the application are covered by the pay-and-refund mechanism. The tool available is the total value of the characteristic passive income (dividends, characteristic income, and characteristic royalties) determined for the benefit of a specific entity, specified in the tax year, amounting to PLN 2 million.

In such a situation:

  • up to the limit of PLN 2 million, an exemption or preferential rate may be applied, provided that the conditions are met;
  • for the excess over PLN 2 million, the payer is charged at the national rate of 19%.

The “Pay” step is when a taxpayer or, in certain cases, a withholding agent may request a refund of the withheld tax under the procedure specified in Article 28b of the Corporate Income Tax Act – the “refund” stage.

Similarly to interest and royalties, the Act provides instruments enabling the application of the pay-and-refund mechanism and the application of preferences at the payment stage. These include:

  • obtaining an opinion on the application of preferences issued by the tax authority, or
  • submitting a WH-OSC declaration by the withholding agent’s management board.

However, it should be remembered that even in such cases, the withholding agent is obligated to exercise due diligence and maintain documentation confirming the applicability of preferences.